Pete Pestillo doesn't ride his motorcycle much anymore. When he has the time, he rides his Harley-Davidson Fat Boy north from Dearborn to the endless bean fields of Michigan's Thumb area. But his day job keeps him too busy to make many motorcycle trips.
As chairman of Visteon Corp., Pestillo has overseen the $19 billion parts supplier's spinoff from its corporate parent, Ford Motor Co.
It has been a difficult birth. Investors are not convinced that Visteon can prosper. The company pays high wages to unionized U.S. workers, and it has yet to establish a major presence outside the United States. Moreover, Visteon's fortunes still are intimately tangled with those of Ford's. Last year, the automaker accounted for 88 percent of Visteon's sales.
As if to remind Pestillo of his company's roots, Ford's Glass House headquarters looms like a ghost outside the window of his office. But none of this fazes the 63-year-old Pestillo, who was vice chairman of Ford before he took his current job. As the world's second largest automotive supplier, Visteon has the resources to outlast smaller rivals, Pestillo predicted. 'Ten years from now, you'll see far fewer suppliers,' he said. 'The profile of the future supplier will be companies like Visteon and Delphi ... They will have a reasonable lineup of products, geographic dispersion and size. I think those things go together.'
Here is how Pestillo plans to boost profits:
Expand in Europe. Visteon acquired Plastic Omnium, and it still is shopping. Pestillo will not name names, but one possible target appears to be Sommer Allibert.
Promote aftermarket sales. Visteon will seek partners such as U.S. retail chains Midas and Pep Boys to distribute its products. Aftermarket sales should top $1 billion this year.
Exploit growing demand for communications, multimedia systems, and onboard navigators and computers.
Sell component systems, such as complete cockpits or front-end modules, rather than individual components. This could help Visteon soften the impact of high U.S. labor costs.
Lessen its dependence on Ford. By 2002, Visteon hopes to raise non-Ford sales to 20 percent. It has had a good start. Last year, nearly 40 percent of newly booked business was with non-Ford customers.
In the months leading up to Visteon's spinoff, Pestillo energetically promoted his strategy in presentations to institutional investors. So far, Wall Street appears unimpressed. 'Over the next year or so, we want to see how he reduces costs,' said Ron Tadross, an analyst for the brokerage firm Credit Suisse First Boston. 'The problem is low profit margins. Wall Street isn't confident they have a full arsenal' of cost-cutting strategies. Visteon has managed to cut the cost of raw materials. But the company's factories should operate more efficiently, Tadross said.
This analysis grates on Pestillo. Visteon has launched lean manufacturing initiatives throughout its factories, and Pestillo says it is getting results. The company expects to cut costs about $600 million this year, matching its annual savings since 1997. But there is a problem: Visteon must surrender much of those gains to its biggest customer. Just before the Visteon spinoff, Ford demanded and got a 5 percent price cut on all parts it had purchased as of January 1. Visteon also agreed to cut prices as it improved productivity annually through 2003. This year, the productivity price cut amounted to 3.5 percent.
Ford's take-no-prisoners approach to pricing might be one reason why Pestillo wants to diversify Visteon's customer lineup. Here is another: The supplier recently acknowledged that its third-quarter earnings will be hurt by the suspension of truck production in three Ford assembly plants. Ford had to divert tires from its plants to supply angry customers who wanted to replace defective Firestone tires. According to the brokerage firm Merrill Lynch, each Ranger pickup and Explorer sport-utility carries up to $3,000 worth of Visteon parts. That could reduce Visteon's third quarter revenues up to $75 million, Merrill Lynch estimates.
As Visteon tries to cut costs, diversify and adjust its product lineup, a key role will be played by the United Auto Workers. Traditionally, Wall Street has viewed the UAW as a hindrance to the U.S. auto industry. Indeed, Visteon pays its 23,500 U.S. workers twice as much as non-union competitors. But Pestillo can count on a key advantage: a longtime friendship with top UAW officials. Two decades ago, Pestillo joined Ford's labor relations department. At the time, the U.S. was mired in recession, and Ford was in deep trouble. The automaker closed factories and laid off thousands of workers. But the union never went on strike, and Ford survived.
GOOD UAW RELATIONS
A lawyer by training, Pestillo negotiated the sale of Ford's Rouge Steel operation and its tractor business in the 1980s. With the UAW's blessing, Ford also sold off most of its seat operations to Lear Corp. Despite downsizing its operations, Ford avoided major labor tensions. This was no small accomplishment. By contrast, General Motors lost an estimated $4 billion over three years when the UAW went on strike to protest cost-cutting efforts at its Delphi parts operation.
'I can step up and do the hard things if necessary,' Pestillo said. 'But I will do them in intelligent and humane ways.'
Pestillo still enjoys good relations with UAW President Steve Yokich, a fiery labor leader who has been a fierce critic of General Motors. That friendship paid off this summer when Visteon sold a majority share of its glass-making operation to Pilkington PLC, one of the world's leading automotive glass makers.
Pilkington of St. Helen, England, will own 81 percent of the glass operation, which generates $800 million in sales.
Several years ago, Ford had tried to sell off its glass plants, but the union threatened a strike and blocked the deal. Yet, the union allowed the sale this year after Visteon and Pilkington guaranteed that the workers' labor contracts would be honored.
This was a major victory for Pestillo. To modernize its glass plants, Visteon would have been forced to spend $250 million. Even then, the operation would have been barely profitable. It makes more sense, Pestillo says, to invest in projects that will turn a profit. Labor leaders say they are willing to give Pestillo a chance. 'If anybody is going to make Visteon work, it's Pete,' said Jerry Sullivan, president of UAW Local 600 in Dearborn. Sullivan's union local represents 1,200 Visteon employees, including some workers in the glass operation. 'I know that he values his relationship with the union, and I think that relationship is going to continue.'
To maintain smooth labor relations, however, Pestillo must overhaul unprofitable businesses more slowly than Wall Street would prefer. For example, several analysts believe Visteon will be hard-pressed to make much money on bumpers, seats and lighting systems. Tadross calls products such as these orphans. But instead of selling these operations, Pestillo wants to package these components into larger, potentially profitable modules.
Thus, Visteon is marketing front-end modules that would include headlights and bumpers. The company also wants to design a complete cockpit, including seats. But, again, Visteon will have a tough time competing against Lear, Johnson Controls Inc. and Magna International for seat business.
Indeed, Pestillo prefers to talk about high-tech products such as telematics, multimedia entertainment and voice-recognition technology. The consulting firm UBS Warburg LLC predicts telematics and multimedia gadgetry will grow into a $47 billion business. To exploit that market, Visteon has created a business unit devoted to communications, entertainment, navigation, onboard computers and sound systems. This year, Visteon booked $550 million in new contracts for telematics and multimedia components. The division will employ 800 people, including 150 employees in Europe. Some of Visteon's telematics customers include General Motors, Nissan Motor Co. Ltd. and Honda Motor Co.
Visteon also strengthened its expertise in voice recognition, a key technology that could speed consumer acceptance of onboard computers, navigators and other innovations. To do so, the company formed an alliance with Lernout & Hauspie, a leader in this field. But Visteon faces formidable competition from such industry giants as Motorola, Siemens, Bosch, Delphi and others. 'They are in the forefront of speech recognition in the auto industry, but they are not alone,' said Paul Hansen, publisher of the Hansen Report, an automotive electronics newsletter in Rye, New Hampshire.
Motorola, for example, won a contract to supply hardware for Ford's RESCU emergency communications service. 'If you compare Motorola's telematics business with Visteon's, Motorola would win hands down,' Hansen said. 'Motorola has much more existing sales in telematics.'
Given the stresses of competition, Pestillo - an avid baseball fan - might be tempted make use of a souvenir bat in his office. It is a gift from former baseball star Gates Brown, who played for the Detroit Tigers. During an interview, Pestillo recounted Brown's rather earthy advice - backed by an emphatic threat to use his bat - to an opposing player who had tried to intimidate him. It's an amusing story, but one cannot imagine Pestillo taking such direct action. He is a patient man who is not easily panicked by adverse quarterly financial results. Pestillo takes a long-term view. So far, investors don't share his patience.
You can e-mail Editor David Sedgwick at [email protected]